Breadcrumbs

EC-COI-96-4

November 19, 1996

FACTS:

A. Background

You were hired by the one state agency ("Hiring State Agency")and were assigned to work full-time for another state agency, theMassachusetts Executive Office of Communities and Development("EOCD"), which in a recent governmental reorganization has becomethe Department of Housing and Community Development ("DHCD").Although you are on the Hiring State Agency's payroll and receivebenefits through that agency, you report to DHCD personnel,who supervise you, assign you work and evaluate your job performance.

You recently purchased a residential rental property("Building") containing three apartment units ("Units"). Two Unitsare occupied by rent-subsidized tenants, one subsidized through theMassachusetts Rental Voucher Program ("MRVP Program") and the othersubsidized through the Section 8 Program.

B. MRVP Program and Section 8 Program

We will generally describe the MRVP Program and the Section 8Program (collectively, "Programs").[1]

1. MRVP Program

In 1992, the Massachusetts Legislature replaced the former so-called Chapter 707 Rental Assistance Program ("Chapter 707Program") with the MRVP Program. Under the Chapter 707 Program andits replacement MRVP Program, qualifying, low-income tenants' rentsin privately owned housing accommodations were and are subsidizedwith monies that originate at the state level. DHCD, succeedingEOCD, now administers the MRVP Program; EOCD and/or the formerMassachusetts Department of Community Affairs ("DCA") administeredthe Chapter 707 Program.

a. State MRVP ACC Contract

In implementing the MRVP Program, DHCD enters into annualcontributions contracts ("State MRVP ACC Contracts") with various"local housing agencies" ("LHAs")[3] pursuant to which DHCD agreesto fund the LHA for MRVP Program rent subsidies administered anddisbursed by the LHA. DHCD is currently a party to such State MRVPACC Contracts with the following LHAs: 159 Massachusetts city ortown housing authorities, including the Housing Authority, asdefined below; the Franklin County Regional Housing Authority; andnine Massachusetts regional, non-profit corporations.

b. MRVP Voucher Payment Contract

When a subsidized MRVP Program tenant has located a qualifyingresidential unit, the LHA contracts with the unit's landlord ("MRVPVoucher Payment Contract") to subsidize the tenant's rent by payingthe subsidized portion thereof directly to the landlord. DHCD isnot a party to the MRVP Voucher Payment Contract.[4]

c. Lease

The tenant pays the balance of the rent to the landlordpursuant to the tenant's separate leasing contract ("lease") withthe landlord. Neither DHCD nor the LHA is a party to suchleases.[5]

2. Section 8 Program

Under the Section 8 Rental Certificate Program and RentalVoucher Program ("Section 8 Program"),[6] qualifying, very low-income tenants' rents in privately owned housing accommodations aresubsidized with monies that originate at the federal level and areregulated initially by the United States Department of Housing andUrban Development ("HUD").

We shall describe in parts b., c. and d. below only that componentof the Section 8 Program described in clause (ii) above in whichDHCD serves as HUD's State PHA ("State-Managed s. 8 Program")through which you receive Section 8 Program rent subsidies, notthat component in which Non-State PHAs contract directly with HUD.

b. State s. 8 ACC Subcontracts - State-Managed s. 8 Program

As permitted (but not required) by HUD, DHCD enters intoannual contributions subcontracts with other entities ("State s. 8ACC Subcontracts") to administer and disburse the Section 8 Programrent subsidies.[10] DHCD is currently a party to State s. 8 ACCSubcontracts with ten entities: eight Massachusetts regional, non-profit corporations; the City of Lynn Housing Authority; and theFranklin County Regional Housing Authority (collectively,"Subcontractors").[11] Pursuant to each State s. 8 ACCSubcontract, DHCD agrees to fund the Subcontractor for Section 8Program rent subsidies administered and disbursed by it.

Even though, DHCD has the Subcontractors undertakeadministration and disbursal obligations, DHCD retains ultimateresponsibility for assuring that HUD's Section 8 Programrequirements are satisfied. To that end, DHCD establishes policiesand procedures for Subcontractors' administration and disbursal ofSection 8 Program rent subsidies, disburses monies to theSubcontractors and monitors each Subcontractors' performance.

c. HAP Contracts - State-Managed s. 8 Program

When a subsidized Section 8 Program tenant has located aqualifying residential unit, the Subcontractor contracts with theunit's landlord ("Housing Assistance Payment" or "HAPContracts")[12] to subsidize the tenant's rent by paying thesubsidized portion thereof directly to the landlord.

d. Lease - State-Managed s. 8 Program

The tenant pays the balance of the rent to the landlordpursuant to the tenant's separate lease with the landlord. A HUD-required addendum must be included in such lease.

C. Your Rent-Subsidized Tenants

You receive rent subsidies through the two Programs, assummarized below.[13]

a. MRVP Program Tenant

This tenant's rent is paid to you, in part, by the tenantpursuant to a lease and, in part, by a certain municipality'shousing authority ("Housing Authority"), as an LHA, pursuantto an MRVP Voucher Payment Contract.[14] The HousingAuthority receives the funds to cover its payments of suchrent subsidies pursuant to its State MRVP ACC Contract withDHCD.

b. Section 8 Program Tenant

This tenant's rent is paid to you, in part, by the tenantpursuant to a lease and, in part, by a certain Massachusettsregional, non-profit corporation ("Corporation"), as aSubcontractor, pursuant to a Section 8 Program HAP Contract.The Corporation, as a Subcontractor, receives the funds tocover its payments of such rent subsidies pursuant to itsState s. 8 ACC Subcontract with DHCD. DHCD, as State PHA,receives the funds to cover its payments to the Corporationpursuant to its Federal s. 8 ACC Contract with HUD.

QUESTION:

ANSWER:

Yes.

DISCUSSION:

You were hired and are paid by the Hiring State Agency. Youhave been assigned to work full-time for DHCD and have reported toand been supervised, assigned work and evaluated by DHCD personnel.You are a state employee[15] of the Hiring State Agency within themeaning of G.L. c. 268A, and you participate in and have officialresponsibility for some DHCD activities.[16]

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As a state employee, you are subject to the restrictions of s.7, which prohibits a state employee from having a direct orindirect financial interest in a contract made by a state agency inwhich the Commonwealth or a state agency is an interested partyunless he is eligible for and has received an exemption. Therestrictions of s. 7 will not apply, however, to a state employeewho, in good faith and within thirty days after he learns of anactual or prospective violation of the section, makes a fulldisclosure of his financial interests to the contracting agency andterminates or disposes of the interest. G.L. c. 268A, s. 7(a).

The theory behind s. 7 is well stated in the above-cited lawreview article by William Buss:

Section 7 announces a rule the basis of which is that, ifno exemption is applicable, any state employee is in aposition to influence the awarding of contracts by anystate agency in a way which may be financially beneficialto himself. In a sense, the rule is a prophylactic one.Because it is impossible to articulate a standard bywhich one can distinguish between employees in a positionto influence and those who are not, all will be treatedas if they have influence.

1. MRVP Program

Under the MRVP Program, landlords receive rent subsidies forqualifying tenants under contracts with LHAs, which in turn havecontracts with DHCD. As applied to your situation, two questionsarise under s. 7. First, is the State MRVP ACC Contract betweenDHCD and the Housing Authority, as an LHA, to provide MRVP Programrent subsidies that will subsidize your tenant's rent a contractmade by a state agency in which a state agency is an interestedparty? Second, do you have a financial interest in that Contract?

Beginning at least as early as 1981, the Commission determinedthat Chapter 707 Program contributions contracts between EOCD orDCA, as the administering state agency, and an LHA, which then paidrent subsidies to the landlord/state employee, was a contract madeby a state agency in which the state agency was an interested partyand in which the landlord/state employee had a financial interest.EC-COI-81-189 (state legislator/partner in realty trust owningChapter 707 Program rent-subsidized units would have impermissiblefinancial interest in Chapter 707 contributions contract betweenDCA and the LHA even though the trust/landlord was not a party tothat contract); 84-109 (judge/landlord of Chapter 707 Program rent-subsidized units had impermissible financial interest in contractbetween DCA and the LHA). In EC-COI-87-14, involving stateagencies' financing low income housing projects, the Commissioncited and adopted the rationale of its earlier opinions. See alsoEC-COI-92-35.

The MRVP Program is in all material respects the same as theformer Chapter 707 Program. Thus, consistent with our precedent,we conclude (i) that DHCD's State MRVP ACC Contract with theHousing Authority to pay the Housing Authority for a portion ofyour tenant's rent obligation is a contract made by a state agency,namely DHCD, in which DHCD is an interested party and (ii) that,because you receive the subsidized portion of your tenant's rentfrom the Housing Authority pursuant to your MRVP Voucher PaymentContract, which is funded pursuant to the State MRVP ACC Contract,you have a financial interest in that state Contract.

2. Section 8 Program

a. State-Managed s. 8 Program

Under the State-Managed s. 8 Program, landlords receive rentsubsidies for qualifying tenants under contracts withSubcontractors, which in turn have contracts with DHCD, which inturn has contracts with HUD. As applied to your situation, thesame two questions arise under s. 7 as we posed in our analysis ofyour receipt of MRVP Program rent subsidies. First, is the States. 8 ACC Subcontract between DHCD (as the State PHA) and theCorporation (as the Subcontractor) to provide Section 8 Programrent subsidies that will subsidize your tenant's rent a contractmade by a state agency in which a state agency is an interestedparty? Second, do you have a financial interest in thatSubcontract?

There does not appear to be any meaningful distinction between(i) DHCD's involvement, as a State PHA, in its State s. 8 ACCSubcontracts with Subcontractors such as the Corporation under theSection 8 Program and (ii) DHCD's involvement in its State MRVP ACCContracts with LHAs such as the Housing Authority under the MRVPProgram. In both Programs, DHCD plays a significant, substantiverole, is an interested party to the subject contract andadministers and disburses the funds to the entity that eventuallycontracts with the landlord to provide the rent

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subsidy. The fact that the Section 8 Program funds originate at the federal level and the MRVP Program funds originate at the state level does not change our view. Among other reasons, that is because DHCD retains ultimate responsibility for assuring that HUD's Section 8 Program requirements are satisfied, establishes policies and procedures for Subcontractors' administration and disbursal of Section 8 Program rent subsidies, disburses monies to the Subcontractors and monitors each Subcontractors' performance.

The Commission has on several occasions considered a stateemployee/landlord's receipt of State-Managed s. 8 Program rentsubsidies. EC-COI-84-105 involved a state legislator/landlord whowas to receive Section 8 Program rent subsidies through the sametype of multi-level contractual arrangements as you do. TheCommission concluded that the legislator had an impermissiblefinancial interest in EOCD's Section 8 ACC Subcontracts with theSubcontractor. In EC-COI-82-12, a state employee/landlord was toreceive Section 8 Program rent subsidies through contractualarrangement in which EOCD, as State PHA, contracted with HUD andthen entered the HAP Contract directly with the landlord, i.e.,EOCD had no Subcontractor.[17] The Commission concluded that thestate employee had an impermissible financial interest in a statecontract. Compare, EC-COI-81-189, involving the statelegislator/partner in a realty trust that received Section 8Program rent subsidies emanating from a HUD Federal s. 8 ACCContract with a Non-State PHA in which EOCD played a minimal roleand was not a party to any contracts, where the Commissiondetermined that such an interest would not implicate s. 7 for thelegislator but specifically limited its conclusion to the facts ofthe case, reserving "its right to rule on the propriety of othercontractual arrangements under the Section 8 Program which involveEOCD or DCA as a party to the contract." Id. n. 4.

Thus, as DHCD's role in the State-Managed s. 8 Program is inall material respects the same as its role in the management of theMRVP Program and consistent with our precedent, we conclude (i)that DHCD's State s. 8 ACC Subcontract with the Corporation to paythe Corporation for a portion of your tenant's rent obligation isa contract made by a state agency, namely DHCD, in which DHCD is aninterested party[18] and (ii) that, because you receive thesubsidized portion of your tenant's rent from the Corporationpursuant to your HAP Payment Contract, which is funded pursuant tothat Subcontract, you have a financial interest in thatSubcontract.

b. Section 8 Program Rent Subsidies - Managed by Non-State PHAs

In reaching the conclusion above regarding State-Managed s. 8Program rent subsidies in which DHCD plays a substantive andcontractual role, we do not alter our precedent addressing Section8 Program rent subsidies that flow directly from HUD to Non-StatePHAs, with no substantive involvement of any state agency, where weconcluded that no state contract was involved. EC-COI-84-109; 81-189. In other words, this opinion does not pertain to Section 8Program rent subsidies that are funded by non-state sourcesand managed by Non-State PHAs in which state agencies are not partiesto contracts and play no substantive role.

3. Termination/Disposition of Financial Interests in Contracts

As you have a financial interest in DHCD's State MRVP ACCContract with the Housing Authority and in DHCD's State s. 8 ACCSubcontract with the Corporation and there are no s. 7 exemptionsavailable to you,[19] you must make full written disclosure to DHCDof your financial interests in those two contracts and terminate ordispose of your interests.[20] In certain opinions involvinghousing and rent subsidies paid to a state employee/landlord, theCommission has permitted extra time in order to avoid unduehardship to innocent third parties, namely the tenants. EC-COI-84-109; 84-105; 82-12; 81-189, all cited above. See also, EC-COI-83-117 (municipal employee/landlord) and 83-63 (countyemployee/landlord).

4. Possible Legislative Amendment

We are aware that this conclusion gives rise to concerns forother state employees who own residential rental properties thatare or may be rented to tenants receiving MRVP Program or Section8 Program rent subsidies. Indeed, it appears to have been for thatreason that, in 1985, after issuing its 1983 and 1984 opinionscited above ( EC-COI-84-105; 84-109; 83-117; 83-63 ), the Commissiondrafted, filed and supported the Legislature's enactment of a bill(House No. 1564) that would have permitted state, county andmunicipal employees to receive "housing assistance payments" onbehalf of eligible tenants pursuant to a program of leased housingor rental assistance provided that the state, county or municipalemployee, as the case may be, did not participate in or haveofficial responsibility for the activities of the administeringstate, county or municipal agency, respectively.

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That bill was not enacted. However, in 1987, the Legislatureamended s. 20, the counterpart provision of s. 7 applicable tomunicipal employees, by adding clause (h), exempting from s. 20'sgeneral prohibition "a municipal employee who is the owner ofresidential rental property and rents such property to a tenantreceiving a rental subsidy administered by a local housingauthority, unless such employee is employed by such local housingauthority in a capacity in which he has responsibility for theadministration of such subsidy programs." See EC-COI-92-31(involving a leased housing inspector for a municipal housingauthority who, as a private landlord, received from the authorityhousing subsidy payments on behalf of a tenant and qualified forthe s. 20(h) exemption).

The Legislature did not enact a parallel amendment of s.7.[21] If it had, such an amendment would have narrowedsignificantly the restrictive effects of s. 7 by exempting from s.7's general prohibition a state employee, such as you, who is theowner of residential rental property and rents such property to atenant receiving a rental subsidy administered by a state agency,unless such employee is employed by such state agency in a capacityin which he has responsibility for the administration of suchsubsidy programs.

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[1] The Directors of each of the Programs provided usinformation about the history, administration and operation of thePrograms.

[2] The MRVP Program subsidies are currently approximately 60%tenant-based and approximately 40% project-based. The tenant-basedcomponent is known as the MRVP Mobility Program because tenantshave more flexibility in choosing housing accommodations. Tenantsentitled to MRVP Program rent subsidies receive either "mobile"vouchers or project-based housing vouchers.

[3] The regulations governing the MRVP Program define "LocalHousing Agency (LHA)" as "Local Housing Authority, a Regional Non-Profit Corporation or other entity under contract to the Departmentto administer the [MRVP] Program." 760 Code Mass.Regs. s. 49.03.

[4] When DHCD's predecessor state agencies administered the MRVPProgram and the Chapter 707 Program, they were not parties to anysuch contracts with landlords either.

[5] The former Chapter 707 Program was somewhat different in thatthe LHA, the landlord and the tenant were all parties to onecontract, which combined the operative provisions of what are nowthe separate MRVP Voucher Payment Contract and the lease. However,in all respects material to this analysis, the former Chapter 707Program and the MRVP Program are similar.

[6] The vast majority of Section 8 Program rent subsidies inMassachusetts are tenant-based.

[7] The federal regulations governing the Section 8 Program define"Public Housing Agency (PHA)" and "Housing Agency (HA)" as the"same thing," namely, "A State, county, municipality or othergovernmental entity or public body (or agency or instrumentalitythereof) authorized to engage in or assist in the development oroperation of low-income housing . . . ." 24 C.F.R. s. 982.4. HUDis not authorized to and does not enter into Federal s. 8 ACCContracts with private entities.

[9] Of the 57,000 Section 8 Program rent subsidies forMassachusetts tenants, 74% flow directly from HUD to Non-StatePHAs, without DHCD involvement; the other 26% flow from HUD toDHCD, a State PHA. (The foregoing figures are approximate.)

[10] DHCD is authorized to perform such functions itself if it soelects. In fact, before 1990 in the Greater Boston area, EOCD andDCA did not subcontract such responsibilities. Rather, they dealtdirectly with and disbursed Section 8 rent subsidies directly tolandlords of subsidized tenants.

[11] We are informed that a public housing authority may serve asa Non-State PHA under a Federal s. 8 ACC Contract with HUD forcertain Section 8 Program funds at the same time as it serves as aSubcontractor under a State s. 8 ACC Subcontract with DHCD forState-Managed Section 8 Program funds. Furthermore, such a housingauthority may simultaneously serve as an LHA under a State ACCContract with DHCD for MRVP Program funds.

[12] Such HAP Contracts incorporate and impose HUD's requirementsas well as DHCD's own requirements for the administration anddisbursal of Section 8 Program subsidies.

[13] When you purchased the Building, you believed that both rent-subsidized tenants were subsidized through the Section 8 Program.

[14] This tenant receives and presents MRVP "mobile" housingvouchers.

[15] "State employee," a person performing services for or holdingan office, position, employment, or membership in a state agency,whether by election, appointment, contract of hire or engagement,whether serving with or without compensation, on a full, regular,part-time, intermittent or consultant basis, including members ofthe general court and executive council. . . . G.L. c. 268A, s.1(q).

[16] Because nothing in this opinion turns on whether you are alsoa "state employee" of DHCD, we need not decide that issue.

[17] Presumably, this took place in the Greater Boston area, where(before 1990) EOCD did enter HAP Contracts directly with landlords.

[18] To the extent that our brief reference in EC-COI-92-35, n.3.,to the Section 8 Program suggests otherwise, based on the facts wehave now been provided, we clarify that a State-Managed Section 8Program rent subsidy does involve a contract made by a state agencyin which a state agency is an interested party within the meaningof s. 7.

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19] The s. 7(b) exemption is available only to state employees whoare not employed by the contracting agency and do not participatein or have official responsibility for any activities of thecontracting agency.

[20] You have said that you intended to dispose of yourinterest in the Building if the Commission were to reach this conclusion.

[21] We also note that the Legislature did not enact a parallelexemption for county employee/landlords.